Hedging Corner: Raising prices 'right'

One of the primary purposes of hedging raw materials costs (crude oil, natural gas, refined products, and petrochemicals) is to guard against the need to raise product prices to maintain profit margins. The risk of raising product prices is, of course, losing customers and sales to competitors who don't raise their prices because of the same fear of losing sales.  According to this WSJ article, there are "right" ways to raise product prices. It's an excellent article, but isn't it better not to have to raise product prices to protect profit margins?

In my experience, I've found very few companies—including energy companies, petrochemical manufacturers, plastics processors, and retailers—with the knowledge and will to protect their profit margins by managing the risk in their raw materials costs. As with raising prices, there are "right" ways to manage risk.  If companies managed price risk "right", they wouldn't have to worry about the "right way" to raise product prices.  Let the other guys raise their prices and lose sales.  Smart hedgers won't have to, maintaining profit margins and retaining sales at the same time.

Much more to follow on the right ways to manage commodity price risk. For starters, I'll present a strategy for natural gas sellers like Exxon-Mobil and Chevron to protect their massive investments in shale gas while natural gas prices are on their back.  The flip side of the strategy works nicely for buyers.

About the author: Tom Langan is an energy and petrochemicals risk management consultant dba WTL Trading. He helps buyers and sellers of commodities control costs, secure profit margins, and increase sales. Articles helpful to resins buyers and sellers will be selected from Tom's own Hedging Corner blog and posted on PlasticsToday in the Hedging Corner.